Need Fund Selection and AA Advice for Variable Annuity

[Brit]

Thank you all for your input on my portfolio (especially @retiredjb). I have revised this version based upon input and provided clarifications and additional information as requested. This is a an awesome learning experience (perhaps I should say learning obsession . I thank you in advance for your any suggestions and commentary.

Emergency funds: Yes
Debt: Mortgage (primary and only residence) $358k @ 3.25%, $200k of equity
Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Federal, 4.7% State
State of Residence: GA
Age: 48
Desired Asset allocation: 66% stocks / 34% bonds
Desired International allocation: 18% of total stock allocation (thus 11.88% of total portfolio)
Portfolio size: ~ $400K


Current retirement assets

3.9% cash towards reducing mortgage debt (as recommended)
0% IBM Employee Stock Purchase Plan

His 401k at IBM
24.70% TOTAL STOCK MKT IDX (OFJE) (0.05%)
13.25% INTL STOCK MKT IDX (OJFF) (0.12%)
5.25% REIT IDX (OJFD) (0.15%)
22.20% TOTAL BOND MARKET (OJFC) (0.06%)
Company match: 100% up to the first 6% of income

@retiredjb asked ““What is in your international fund? I could not find any info on the internet. The cost is right, but the fund may or may not be complete”

Answer: The most detail that I can provide is:

Market cap breakdown:
- Large (Over $18.1 billion) 44.18%
- Medium ($2.4 - $18.1 billion) 38.63%
- Small (Under $2.4 billion) 17.19%

Top 10 Holdings (8.30% of portfolio)
1 Nestle 1.21%
2 HSBC 1.00 %
3 Vodafone 0.88%
4 Novartis 0.79%
5 BP 0.79%
6 Royal Dutch Shell 0.80 %
7 Roche Holdings 0.74%
8 GlaxoSmithKline 0.72%
9 Samsung 0.70%
10 Toyota 0.67%



His Back-door Roth IRA at Fidelity (revised as recommended)
1.25% Shares Russell 3000 (IWV) (0.20%)


Her Back-door Roth IRA at Fidelity (revised as recommended)
1.25% Shares Russell 3000 (IWV) (0.20%)


His Rollover IRA Variable Annuity at Prudential (Retirement X Series)
2.8% AST Lord Abbett Core Fixed Income (US00767H6595) (0.80%)
2.8% AST Neuberger Berman / LSV Mid-Cap Value (US00767H5761) (1.03%)
2.8% AST T. Rowe Price Natural Resources (US00767H4699) (1.03%)
14.20% AST T. Rowe Price Asset Allocation (US00767H4939) (0.95%)
2.8% AST T. Rowe Price Global Bond (US00767H4855) (0.95%)
2.8% AST Western Asset Core Plus Bond (US00767H6009) (0.80%)


Contributions

New annual Contributions
$33,000 his 401k (max out + matching)
$5,000 his IRA/Roth IRA
$5,000 her IRA/Roth IRA
$20,000 cash payment to mortgage principle (revised as recommended)
$10,000 Employee Share Purchase Plan (Purchased at 5% discount from market price). Will hold for a year to avoid short-term capital gains then sell every quarter thereafter and use proceeds for additional cash payment to mortgage principle..

Available funds

Funds available in His Hybrid Annuity at Prudential
AST Academic Strategies Asset Alloc Port (US00767H8328) (1.48%)
AST Advanced Strategies Portfolio (US00767H7098) (0.95%)
AST Balanced Asset Allocation Portfolio (US00767H7908) (1.01%)
AST BlackRock Global Strategies Port (US00767H2792) (1.08%)
AST BlackRock Value Portfolio (US00767H7825) (0.95%)
AST Capital Grow Asset Allocation Portf (US00767H8245) (1.04%)
AST CLS Moderate Asset Allocation Portf (US00767H3030) (1.03%)
AST Cohen & Steers Realty (US00767H8161) (1.13%)
AST Federated Aggressive Growth (US00767H7668) (1.11%)
AST FI Pyramis* AA Portfolio (US00767H5019) (1.32%)
AST First Trust Balanced Target Portfoli (US00767H4442) (0.94%)
AST First Trust CapAppr Target Portfolio (US00767H7585) (0.93%)
AST Franklin Templtn Founding Fnds Alloc (FFALX) (1.06%)
AST Global Real Estate (US00767H3865) (1.18%)
AST Goldman Sachs Concentrated Growth (US00767H7411) (1.00%)
AST Goldman Sachs Large-Cap Value Port (US00767H8732) (0.86%)
AST Goldman Sachs Mid-Cap Growth (US00767H7338) (1.13%)
AST Goldman Sachs Small-Cap Value Portfo (US00767H7254) (1.10%)
AST High Yield Portfolio (US00767H7171) (0.86%)
AST Horizon Moderate AssetAllocationPort (US00767H4020) (1.03%)
AST International Growth (US00767H6918) (1.03%)
AST International Value (US00767H6835) (1.12%)
AST J.P. Morgan Global Thematic (US00767H1059) (1.10%)
AST Jennison Large-Cap Growth (US00767H3295) (1.00%)
AST Jennison Large-Cap Value (US00767H337) (0.86%)
AST JP Morgan Intl Equity (US00767H6751) (1.05%)
AST JP Morgan Strat Opp (US00767H4517) (1.13%)
AST Large-Cap Value (US00767H6678) (0.82%)
AST Marsico Capital Growth (US00767H6421) (0.96%)
AST MFS Global Equity (US00767H6348) (1.20%)
AST MFS Growth (US00767H6264) (0.95%)
AST MFS Large-Cap Value (ILVAX) (0;65%)
AST Mid-Cap Value (US00767H6181) (1.09%)
AST Money Market (US00767H5928) (0.18%)
AST Neuberger Berman Core Bond Portfolio (US00767H2461) (0.84%)
AST Neuberger Berman Mid-Cap Growth (US00767H5845) (1.03%)
AST New Discovery Asset Allocation (US00767H2206) (unknown)
AST Parametric Emerging Markets Equity (US00767H3782) (1.43%)
AST PIMCO Limited Maturity Bond (US00767H5506) (0.77%)
AST PIMCO Total Return Bond (US00767H5431) (0.74%)
AST Preservation Asset Allocation Portf (US00767H535) (0.96%)
AST Prudential Core Bond Portfolio (US00767H2537) (0.78%)
AST QMA US Equity Alpha (US00767H8658) (1.00%)
AST Schroders Global Tactical Portfolio (US00767H2040) (1.24%)
AST Schroders Multi-Asset World StrtPort (US00767H8401) (1.22%)
AST Small Cap Growth (US00767H5274) (1.03%)
AST Small Cap Value (US00767H5191) (1.03%)
AST T. Rowe Price Equity Income Port (US00767H8815) (0.88%)
AST T. Rowe Price Large-Cap Growth (US00767H477) (0.98%)
AST Wellington Mgmt Hedged Equity Port (US00767H808) (0.87%)


Funds available in his 401(k)
The “core funds” that I am currently invested in seem very aligned with their Vanguard counterparts and are also low cost. I didn't list the ticker symbol or expenses for this (very long) list of funds, but I would gladly do so if there is value in deeper analysis of the fund options for this account.


QUESTIONS:

1. What is the best selection of funds, and asset allocation for those funds for the Variable Annuity to (a) maximize potential growth and (b) minimize costs.

[Johm221122]

Hope this bumps you up,
I would pay down house before taxable
I bonds maybe for emergency fund
AA looks good,could do without annuity
john

[Taylor Larimore]

Brit:

His Rollover 401k Hybrid Annuity at Prudential (Retirement X Series)
Has a guaranteed return of 6% with possible upside, and monthly income during retirement

There is no liquid investment available today with a guaranteed return of 6% with possible upside. I would investigate this Hybrid Annuity carefully.

Best wishes.
Taylor

[Default User BR]

I would pay down house before taxable

I would not.


Brian

[Brit]

Thanks to all! Clearly I need to look at the annuity in more depth.

@brian. What would you propose as an alternative to paying off the house and why?

[retiredjg]

Welcome to the forum!

I have no idea what His Rollover 401k Hybrid Annuity at Prudential (Retirement X Series) might be. How is this different from a Rollover IRA? If you should invest in this hybrid annuity the same way you would invest in an IRA or a 401k, I'd put it all in the AST PIMCO Total Return Bond (US00767H5431) (0.74%). This is a good fund and one of the better choices on the list.

Is your money tied up there? Could it be rolled into your current 401k?


Regarding your Roth IRAs....I see a couple of problems. First, you are investing in Vanguard funds at Fidelity. There has to be a transaction charge for that. It would be better to use a Fidelity product or something from the no-transaction fee list (there are several good choices there).

Second, each Roth IRA should hold only one fund. It doesn't make good sense to split 1.3% of your portfolio into 4 different funds. This just adds unnecessary complexity and certainly contributes nothing worthwhile.


Regarding the $10,000 Employee Share Purchase Plan (Purchased at 5% discount from market price), how soon can you sell this stuff? You don't want much building up in your portfolio. I would either put this money or the other money you plan to put in taxable into the mortgage.

You didn't list any of this stock in your current portfolio. If you hold any currently, you need to count that as part of your stock allocation.


What is in your international fund? I could not find any info on the internet. The cost is right, but the fund may or may not be complete. Also, you said you want 18% of your stock (11.88% of the portfolio) in international. Is that what you meant to say? Or did you mean 48% US and 18% International?


I'm thinking something along this line (very rough draft):

Taxable 3.8%
3.8% Vanguard Total International Index

His 401k at IBM 65.4%
41.2% TOTAL STOCK MKT IDX (OFJE) (0.05%)
13.25% INTL STOCK MKT IDX (OJFF) (0.12%)
5.15% REIT IDX (OJFD) (0.15%)
5.8% TOTAL BOND MARKET (OJFC) (0.06%)

His Back-door Roth IRA at Fidelity 1.3%
1.3% iShares Russell 3000 IWV .20% (I think)

His Rollover 401k Hybrid Annuity at Prudential (Retirement X Series) 28.2%
28.2% AST PIMCO Total Return Bond (US00767H5431) (0.74%)

Her Back-door Roth IRA at Fidelity (established October 2012)
1.3% iShares Russell 3000 IWV .20% (I think)

Like I said, just a rough draft, but doesn't that seem much easier? And cheaper?

[retiredjg]

Regarding the mortgage, you are probably paying AMT. If I understand right, you lose part or all of your mortgage deduction. Is that correct? That might be a factor in whether you pay down the mortgage faster than on schedule.

[Default User BR]

@brian. What would you propose as an alternative to paying off the house and why?

You have a good fixed rate. Use the leverage that provides to invest according to plan. Your expected (although certainly not guaranteed) return is higher with a diversified portfolio.

A low fixed rate is a good hedge against rising interest rates and inflation.


Brian

[Brit]

Regarding the mortgage, you are probably paying AMT. If I understand right, you lose part or all of your mortgage deduction. Is that correct? That might be a factor in whether you pay down the mortgage faster than on schedule.

Yes I am paying (some) AMT and I believe that I also lose part (but certainly not all) of my mortgage deduction.

Given that factor what would your recommendation be regarding the mortgage.

Last but not least THANKS for the thorough analysis and recommendations, especially the simplicity elements!

[Johm221122]

34% of portfolio in bonds,mortgage is 3.25%,what do you expect bonds to deliver in next 10 years. Plus 34% in bonds is slightly low for 48,paying debt would help reduce risk buy building equity.Making extra payments towards house cuts risk of higher stock allocation without adding bonds.
john

[Brit]

I updated the original post to take the feedback to-date into consideration. Thank you all for that. Would value your input on remaining and revised questions!

[pingo]

Welcome to the forum, Brit!

Perhaps if you edit the thread title to include "IBM 401k" it'll lure someone who knows more about your options, like what kind of international fund you're dealing with (i.e. whether it includes emerging markets or not).

Also, before doing any taxable investing, it would be worthwhile to see if your IBM 401k permits both of the following:

(1) After-tax contributions. This option is sometimes provided to allow additional after-tax savings that would be tax-deferred, but taxed as income when withdrawn. (1) alone is not usually better than regular taxable investing.
(2) Regular (at least annual) direct rollovers of the after-tax savings to, say, your Roth IRA, in which case you'd pay very little in taxes on the earnings for the opportunity to dramatically expand your tax-free Roth IRA.

If you can do (1) and (2), you may be able to save an additional $17,000 in your 401k ($50,000/yr total allowed in 401k) of what would otherwise become taxable investments. I do not know if your discounted employee stock purchases count toward the $50k 401k limit. If so, someone else will have to chime in with whether it is better to do one or the other.

2.6% cash towards reducing mortgage debt

This 2.6% cash should not be included with portfolio assets. I'm nitpicking, as 2.6% won't move the needle much when adjusting the other percents, but I thought I'd point it out.

[smpatel]

Brit,

Thanks for asking! Big Blue's 401k choices are good.
I would look your portfolio from a different angle, treat your mortgage as a negative bond allocation on your portfolio and with your size it pretty much wipes out your bond allocation. Pl pay down mortgage aggressively, I agree with John here. In my opinion you are leveraged to invest in stocks by holding bonds on your portfolio.

With 73K per year future investments and maxing out the retirement accounts, I see no need to invest in taxable until mortgage is paid off. So 10k you have listed could go to mortgage payoff as well, at your age that should be the priority IMO as you are losing some deduction anyway. Not sure why you have nw of only 600k (including house) though you have clearly indicated your plan to save more in future.

After mortgage payoff, build allocation in the bond in future, this will hep you navigate stock market better with piece of mind. This is my opinion only.

Hope that helps,

[Brit]

@pingo, great idea to change the title of the posting to target the help needed, THANKS!

[dhodson]

as mentioned the only decent thing in those variable annuities is the lifetime income rider and this gives you an idea where that is heading

http://www.depositaccounts.com/forum/th ... ntees.html

[UGA investor]

I'm assuming that your Prudential Annuity is the HD6 Bonus. I can provide you an explanation of how it works if you do not understand. or if others want a clear explanation.
You typically should not invest in the annuity the same way you would an IRA or 401k. The question you have to ask yourself is:
Are you going to want to surrender the policy in the future?
Annuities are expensive, but they can also a good way to mitigate risk. Right now your surrender penalty is too high (and the broker got paid a nice commission to lock you in) for you to surrender it now. If you are going to surrender it, you will want to look at the guaranteed account if they have one. It will keep you from losing money, and keep you above the fees eating it away. If you are going to keep it, take advantage of the guaranteed 6% growth to the benefit base (what your retirement income number will be based upon), and swing for the fences with the underlying investment funds. If your investments outpace the 6%, you will get that growth. And once it stops growing you will still get the 6% on top of it.

[Brit]

@UGA Invester, THANK YOU very much for this posting. Additional questions below.

I'm assuming that your Prudential Annuity is the HD6 Bonus. I can provide you an explanation of how it works if you do not understand.

Yes that's my understanding and yes I would value a more detailed explanation of the HD6 bonus.

Are you going to want to surrender the policy in the future?

No, at least not for the next 9 years due to the heavy penalty. My primary goal is to gain from the lifetime income living benefit.

If you are going to keep it, take advantage of the guaranteed 6% growth to the benefit base (what your retirement income number will be based upon), and swing for the fences with the underlying investment funds.

I've lived in the US for the last 20 years (in GA) but I'm a bit lost on the "swing for the fences" statement. I think what you're saying is to structure funds and asset allocation to align with the best probability of gaining market upside. It's that particular point (which funds to use and what asset allocation to have) that I am struggling with, can you help here?

Much thanks!

[UGA investor]

@UGA Invester, THANK YOU very much for this posting. Additional questions below.

I'm assuming that your Prudential Annuity is the HD6 Bonus. I can provide you an explanation of how it works if you do not understand.

Yes that's my understanding and yes I would value a more detailed explanation of the HD6 bonus.

Are you going to want to surrender the policy in the future?

No, at least not for the next 9 years due to the heavy penalty. My primary goal is to gain from the lifetime income living benefit.

If you are going to keep it, take advantage of the guaranteed 6% growth to the benefit base (what your retirement income number will be based upon), and swing for the fences with the underlying investment funds.

I've lived in the US for the last 20 years (in GA) but I'm a bit lost on the "swing for the fences" statement. I think what you're saying is to structure funds and asset allocation to align with the best probability of gaining market upside. It's that particular point (which funds to use and what asset allocation to have) that I am struggling with, can you help here?

Much thanks!

Annuities have 2 amounts stated: The account value (which will fluctuate with the underlying investments and where the fees are drawn from) and the Benefit base (which by design will only go up until you take withdrawals or reach a certain age).
The total all in fees for this annuity are likely in the 3.5-4% range. So your account value has that drag on your performance every year. With the "bonus" it adds a extra % credit to your account on the front end, but has a longer surrender and higher fees during the surrender so the insurance company can recoup that bonus they gave you.
Your benefit base will grow by 6% annually and is credited daily. If on any day, you account value is more than your benefit base, that number gets locked in as your new benefit base, and that new number will grow at 6%.
The problem is that over 9 years, unless it is a straight bull market (just goes up), your account value is likely to be under your benefit base because of the fees associated with it. You would need to return over 9% annually to keep up with the benefit base. Surrendering the annuity will likely not be a great option $ wise. If you are lucky the market ran up when you bought it, and you were locking in along the way.
For ease of numbers: If you put in $100k into the policy, in 17 years (at age 65) your benefit base would be roughly $254k. At 65 you could draw 5% in income per year for the rest of the contract owners life (you did not state if it was a single or joint policy). This is about $12,701.76 per year. This is if your account value NEVER gets above your benefit base.
Now using old rule of thumb of a 4% withdrawal rate, you would need to turn your same initial $100k into $317,544 to get the same income. Over an 17 year period you would need a compounding rate of 7.03%. Also keep in mind that the 4% withdrawal rate has a historical success rate of a little over 70% (per CFP).
A 3% (viewed as safe) withdrawal rate means you need $423,391.90 or a compounding 8.85% over the next 17 years.

The "swing for the fences" statement is a baseball analogy. The 6% growth is like getting a double: you know you are going to get at least that. If you know you are going to get that, you would swing for a homerun. You are right in your assumption of meaning.

[Brit]

For those who would like more detail on the Highest Daily Lifetime Income benefit of the Variable Annuity that i own at Prudential see here:

http://www.retirementredzone.prudential ... zone/16887

In my particular case I would get 5% of the Protected Withdrawal Value at age 59.5 and increases to 6% by age 84.

[Brit]

@USA Investor, Thank you, very helpful information!

I've refined the title of the main posting to focus on two specific questions. Regardless of this being a Variable Annuity, what would be the recommended choice of funds and asset allocation amongst those funds to position for best financial return over the next 12 years.

Recommendations greatly appreciated!

[retiredjg]

Brit, thanks for the update.

Regarding your international fund, we now know the fund contains small cap stocks and that is a good thing. What we don't know is whether the fund contains stocks from emerging market countries.

Since the fund is an index fund, it has to follow an index. The name of that index should be in some kind of summary statement about the fund, usually one of the first things you run across in a fund information sheet. Can you see if you can find that?

Regarding your 401k annuity thing, my original suggestion was to put PIMCO's Total Return Bond Fund there, but it appears you have some question about that.

It is not completely clear to me why the annuity should not be invested in the same way you would invest in an IRA or a 401k. Annuity or not, costs still matter and that is one of the lowest cost funds in the lineup. On the other hand, if the true cost of the annuity is 3.5 to 4% range, the smaller differences in the expense ratios of the different choices probably does not matter.

It appears that USA Investor's point is that the more the annuity grows, the more payout you get if you annuitize it and take income. To take advantage of that, you might want stocks there. Or maybe a balanced fund of stocks and bonds. I can't say I disagree with that - I don't know enough about the product to have much of an opinion.

There are some other choices you could probably use. I'd be cautious with the AST MFS Large-Cap Value (ILVAX) (0;65%) which seems to be an anomaly - like someone looked it up on the internet and put in the internet expense ratio. I suspect that expense ratio is not correct.

If you do choose a stock fund for the annuity, you will need to adjust the rest of your portfolio to accommodate more bonds. This is no big deal. You just have to remember to do it.

Keep in mind that the amount of money you save is the most important thing...and you are saving a lot of money. Pick something, keep things simple, and just be happy with what you've done.